Becoming A Hedge Fund Manager Is Not Easy
Being active as a hedge fund manager has its perks, if you are successful. The King of the Hedgies is recently John Paulson who raked in 1bn per year by shorting the sub prime markets and others. The million dollar question is: Can you do it?
The answer to that question is not an easy one. Just like it is possible for everyone to be a sports star. If you have the right physical capacity, the mental toughness and the commitment you can get to the top of your game, and of course, there is an element of fortune in everything .The first thing to know about hedge funds is what they are. There are a myriad of resources on the web that will go into chapter and verse but the simple explanation is that, typically, a hedge fund is a set up as a business which is set up in a tax efficient jurisdiction such as the Caymans or BVI, for example.
The business commonly has a number of classes of shares, one are mangement shares of the fund business itself and the other shares are investors shares, which whisk no voting rights. This business will have diverse service accommodaters such as:
Prime brokers accommodate a gamut of customised services to hedge funds. Recent services include handling trade execution, clearing and settlement, providing financing and technology services, risk management and operational help facilities, securities lending, and making introductions to sources of capital.
Some hedge hedge funds conduct administration internally whilst others choose to outsource particular functions such as their accounting, investor services, risk study or performance measurement functions to third party administrators. Some outsourcers propose independent pricing of a fund’s portfolio of securities.
Hedge fund assets are in general held with a custodian, including cash in the fund also as the actual securities. Custodians may as well control flow of capital to meet margin calls. Of course there will as well be a manager of the fund. Assuming you are the one looking to set the fund up, that would be you.
This all sounds a little difficult but there are plenty of administrative services that could put this set-up together for you for around $70,000. The set up, however, is not the issue. Getting money into the fund is. Lets say you have a fund set up, you have even managed to get yourself a fund management business correctly licensed, you are ready to go as a newly fledged hedge fund manager. Issue now is that you must get money into the fund and this is where your problems start.
The continuing fees from your administrators above are payable on an yearly basis so your overhead is there. Covering these overheads will be the fees you get from your fund. Fees are the now notorious ‘2 & 20’ meaning that there is a 2% yearly fee and 20% of the profits. Lets say your overheads are 100,000 per annum, you will need at least 5mn into your fund for the yearly fee to cover your overhead. In anyone’s language, that is a large chunk of money. To get this you will need to prove to in reference to investors that you know what you are doing.
Sarah Butcher, editor of eFinancialCareers.com agrees. “You can’t just be someone off the street and set up a hedge fund,” she says. “Investors want to put their money with someone who has a track record.” When speaking with investors you need to be able to show them your performance and the strategies you use. Gaining this encounter is the key. Going the accustomed route you will either exercise with an investment bank or directly with a hedge fund business. Investment banks are searching someone with a good degree, maybe in maths or physics, they want someone who is tough minded, a quick acquireer and someone who has the capacity to make trading decisions based around sometimes complex structures.
Finding your way directly into hedge funds can be difficult, they are notoriously secretive. By far the more tradional route is through working as a trader with an investment bank. So if you have missed the boat as far as becoming a new boy at an investment house are your dreams of becoming a hegde fund trader over? Not fairly. The thing about managing money is that people are searching performance. If you can show a track record of performance then people will want to invest money with you.
You clearly must have the capacity for enjoying the stock market, so you likely have been buying and selling stocks but you will need to acquire more about other market instrument such as futures etc. You can do this by opening an account at a reputable trading house and downloading their trading system. They will accommodate you trade ideas and the explanations behind them and they will support you generate your portfolio operating on trades much like what the hedge funds do. If you immerse yourself in this type of trading, making profits on your own portfolio, then you are creating a track record.
If you are successful enough then you may get to the point where you presume you have the capacity to start a fund. We are not saying it is easy, it most certainly is not, but not being a 20 year old with a first from Oxford does not necessarily limit your in reference to career as a fund manager. It is a long difficult slog to get anyone to presume that you are credible but the rewards are there if you get to that stage. The billionaire boys have spent years perfecting their art in most cases and now have the ear of massive amounts of money, but don’t give up becuase you can’t work in an investment bank.
Commemorate ‘money follows performance’. If you would like to see if you have what it takes there are a number of platforms you can download for free and experiment out your skills. This online trading system is something you may want to consider if you are trading.